Nothing uniquely Chinese about Glaxo bribery case

The pharmaceutical industry routinely bribes doctors in the West to get its drugs prescribed, although the practice is given a thin façade

Tom Holland

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.

The media have been in a frenzy for the last few weeks over the detention of four GlaxoSmithKline employees in China.

Allegedly the four had channelled billions of yuan through a travel agency in order to bribe doctors to prescribe the British pharmaceutical company's drugs.

Reports have variously described the case as an attack on foreign companies by protectionist local authorities, a politically driven plot to marginalise the princeling children of late Communist Party general secretary Hu Yaobang, or a populist move by China's new leadership to bring down drug prices.

It may well be all three. China's leaders have always been adept at killing multiple birds with a single stone.

But one thing the Glaxo case is certainly not, despite what the reports make out, is uniquely Chinese.

When Glaxo chief executive Andrew Witty insisted last week he knew nothing about any bribe-paying by the company's staff in China, telling London's TheDaily Telegraph "this looks like a number of individuals that have worked outside our systems", he was being disingenuous.

Sure, no doubt Witty was unaware of the details. But allegations that his employees were paying bribes to secure sales certainly came as no surprise. In the drug industry, it's almost standard practice.

Over the last 15 years or so, big pharmaceutical companies have switched from a model based on developing new drugs to one based on the aggressive marketing of existing products.

Marc-André Gagnon, a professor of public policy at Carleton University in Ottawa, likens the way the business works to three customers at a restaurant table. The first orders lunch. The second eats it. And the third pays the bill.

At this restaurant, however, the waiter is paid on commission. Not surprisingly, he presses the first customer to order the most expensive dishes on the menu. He may even promise him a couple of martinis on the house if he orders an especially lavish meal, whether or not it suits the second customer's digestion, or the third's pocket.

The first customer here is the doctor, responsible for prescribing drugs. The second is the patient. And footing the bill, the third is either the patient's insurance company or the state health-care system, depending on the country.

In reality, drug companies splash out on a lot more than martinis. The stories of 3 billion yuan (HK$3.78 billion) passed to a travel agent suggests Glaxo's staff were funding expensive jaunts to reward doctors for prescribing their drugs.

This is a time-honoured tactic in the West. Ostensibly, the doctor is attending a medical conference, which just happens to be in an exotic location. In reality he is enjoying a free holiday in a luxury beach resort.

Drug companies also pay doctors handsomely for consultancy services, writing papers, and participating in clinical trials. All are bribes for prescribing, or rather over-prescribing, drugs.

In China, where medical salaries can be just a few hundred yuan a month, doctors rely heavily on this extra income.

But the practice is just as common in other markets. According to Gagnon, in the US, the pharmaceutical industry spends some US$40 billion a year on promoting drugs to doctors. That's US$61,000 for each physician.

And drug companies often overstep the mark into illegality. Since 1991, they have paid US$29 billion in fines in the US alone.

By far the biggest offender is Glaxo. Just last year it paid US$3 billion to settle a US federal suit for paying bribes and unlawfully promoting three drugs. Overall, since 1991, Glaxo has paid a stunning US$7.6 billion in US penalties (see charts).

So, no, there is nothing especially Chinese in the latest drug-industry corruption case, except perhaps for the amount of media attention it is getting.

In China most of the biz are involved in corruption to certain extend. Most MNC are using subcontractors to avoid being involved in corruption. But their subcontractors, local firms, always sell using bribe as a tool. Nothing new and not likely to change. But it does hurt the industry as corruption cost 10 to 30% of the overall cost and cut into the profit margin. That's why in China u almost never see an IT company making profit or normally very low net margin. It hurt the industry as companies lost that margin to reinvest to improve productivity. That's why IT companies in China is still lacking behind.

John Adams Aug 1st 20139:53am

Yes, and excellent article !
It's just surprising that it takes something like the GSK case in China and a diligent financial reporter to dig out this kind of nasty stuff and and bring it to the public's attention.
An equally diligent SCMP general reporter could well do to email Mr Holland's article to the head of GSK in UK and ask for his personal comments
I hope that some senior people at GSK in both China and UK do some serious time in jail over this.

dunndavid Aug 1st 20138:29am

Excellent article. What those charts show me is not that GSK is the most unethical, it's that all of the drug companies play the game. Comparing the amount of marketing expense one company to the next or the fines they incur could be related to the markets they are most active, their mix of products and many other factors, not just the drug company's "aggressiveness." For instance if a certain drug company had a mix of new products that profited from aggressive marketing, than that company's marketing and fines would both be high. If you are a company that produced more commodity-like or mature products, marketing costs and fines might both be low. The real culprit here is not the drug companies but separating costs from the party that actually pays. The solution probably would be health insurance attached to the individual, high deductable level and free-market health care with perhaps a government program for truly catastrophic expense.

dunndavid Aug 1st 20138:29am

Excellent article. What those charts show me is not that GSK is the most unethical, it's that all of the drug companies play the game. Comparing the amount of marketing expense one company to the next or the fines they incur could be related to the markets they are most active, their mix of products and many other factors, not just the drug company's "aggressiveness." For instance if a certain drug company had a mix of new products that profited from aggressive marketing, than that company's marketing and fines would both be high. If you are a company that produced more commodity-like or mature products, marketing costs and fines might both be low. The real culprit here is not the drug companies but separating costs from the party that actually pays. The solution probably would be health insurance attached to the individual, high deductable level and free-market health care with perhaps a government program for truly catastrophic expense.

whymak Aug 4th 20135:57am

SpeakFreely: It's hard for me to fathom why some folks are so anxious to make up anecdotes about China. Worse, they use anecdotal falsehoods and hearsays to generalize into China's state of the economy.
Your “facts”: "(market cap) below peak and all below 1B USD despite they have 20 to 50k employees."
To put what you say in perspective, let me list the market cap, revenue and headcount for 4 companies:
IBM: 214B, 102B, 434K
Oracle: 153B, 37B, 115K
Google: 302B, 55B, 54K
MSFT: 266B, 78B, 96K
Revenues/employee for 4 firms are respectively 235K, 322K, 1,018K, 813K.
Reason for spread is due to low value added from customized applications, consulting, to high value platform software.
According to your numbers, even if one assigns a ridiculously low value, 1, to market cap/revenue ratio, Chinese ADRs’ employee productivity is at best 50K (1 billion revenue from 20K employees).
Only morons will buy Chinese stocks. Hope your feel good expectation of Chinese IT demise stays intact while doing business with yellow people.

whymak Aug 2nd 201310:08am

SpeakFreely: $2 billion is a chicken-feed microcap. It represents nothing. True, I know next to nothing about China's software and applications market or what may be classified as IT companies in China.
Take Baidu or Alibaba, which is a huge company with 31 business units after the integration of e-commerce, e-finance (Tao Bao 淘寶) and social networks (Tencent 騰訊, better known as QQ) businesses. It is almost like eBay, Amazon, PayPal and Facebook all rolled into one. Baidu beats the pants off Google in the search engine and advertising businesses, prompting the latter crybaby using non-cooporation with PRC government as excuse for its poor market penetration. With the Snowden affair, we all know US companies, in particular Google, follow the marching orders of NSA.
It's silly for you to use stock market price as a proxy to benchmark a company's performance. First, there is no proven correlation between fundamental valuation and market price. In all my years offering M&A fairness opinions to corporate empty suits, synergies and fundamental values derived from discounted free cash flow, enterprise and brand values are nothing but smoke and mirrors. Like Democracy, stock valuation is just another religion with many sects.
For religion, it's better you stick to your church while I go to mine.
As a wakeup call, look at how China is dominating the rest of world in total top spots in IBM ACM International Competition. This points to whence future software talents come.

SpeakFreely Aug 1st 201311:43pm

Whymack: check out the top 5 China IT service companies ADR stocks. One went bankrupt form peak of mkt cap of close to 2b usd because of fradelunet data and the rest 4 are 70 to 80% below peak and all below 1B USD despite they have 20 to 50k employees. How do i know, i was an senior IT executive and I worked in both Hk, china and US, it is extremely hard to fine good IT tech in China except hackers I guess. Check out their net profit margin mostly are around 5% that is way below the industry standard that's why their mkt cap is so low.

I'm a qualified accountant but I have been in IT Industy for almost 30 years in high end IT consulting and involved in IPO in USA for the largest IT company in China...believe it or not I was in the bell ringing in NY.